RPSM09101750 - Technical Pages: Member benefits: A secured pension: Lifetime annuity: Circumstances where the level of lifetime annuity can decrease

Circumstances where the level of lifetime annuity can decrease

[Para 3(1)(d), Sch 28][Para 13(2) and (4), Sch 10, FA 2005][The Registered Pension Schemes (Prescribed Manner of Determining Amount of Annuities) Regulations 2006- SI 2006/568]

The annual amount payable to an annuitant from a lifetime annuity may vary from year to year but the circumstances in which the annual amount payable in any year can fall below the amount paid in the previous year are limited. However, providing the annual amount is determined in accordance with one of the following alternative methods we would not consider that any reduction in the annual amount would be subject to the tax charges set out in RPSM09101580.

Method One - Indexation

Using this method, where after allowing for any contractual charges, the ‘variation’ is in line with, or by a percentage which does not exceed, the percentage by which the amount would vary if in line with, changes in

• RPI,
• the market value of any ‘freely marketable assets’,
• an index reflecting the value of ‘freely marketable assets’.

‘Freely marketable assets’ means assets which are sold on the open market at a price not determined by the member.

Method Two - With profits variations

Using this method, the variation in the annual amount from year to year reflects variable bonuses added because the annuity contract participates in an insurance company’s with profits fund. Such bonuses must be in accordance with an insurance company’s published ‘Principles and Practices of Financial Management’ in relation to with-profits business, as required under section 6.10 of the Financial Services Authority’s Conduct of Business Sourcebook as it stood immediately before 6 April 2006.

Method Three - Indexation/with profits combination

Using any combination of the Method One and Method Two is acceptable.

Method Four - Selected rate of growth linked to Methods One, Two or Three

Using this method, the variation in the annual amount paid from year to year is dependent on the factors used in Methods One, Two or Three but the member selects the starting level of their annuity based on an assumed annual level of growth of between 0% and 5% in the relevant factor to which their annuity is linked. For example, if increases above the starting level are dependent on bonuses being added by an insurance company’s with profits fund, if the with profits fund suffers losses, the amount paid could fall below the level payable in the previous year.

Method Five - Flexible withdrawals

Using this method variations in the annual amount paid from year to year must be determined in accordance with the following conditions.

The first condition is where the amount of the annuity payable is linked to any of the factors specified in Methods One, Two or Three (or any combination of those factors).

The second condition is that a review must be conducted, by the insurance company by whom the annuity is provided, at least once every 5 years of the value of the sums and assets which are applied towards the provision of the annuity.

The third condition is that at the time of the review, the maximum and minimum amount of income that may be drawn in each year until the next review must be determined.

The maximum amount of income which the annuitant may draw is 120% of the annual rate of a level annuity which could be purchased with the sums and assets which are applied to its provision for the member, for the term for which the annuity is provided.

In this context the expression ‘level annuity’ means a single life level annuity if a single life annuity has been purchased. If a joint life annuity has been purchased, then it means a joint life level annuity with the same profile between the joint lives as that actually purchased. Likewise if the annuity being purchased is not an impaired life annuity then one should not compare it with an impaired life level annuity.

The minimum amount of income which the annuitant may draw is half of the annual rate of a level annuity which could be paid upon the assumptions in the preceding paragraph of this condition.

For the purposes of this Method, the annual rate of an annuity which could be purchased with the sums and assets applied to its provision shall be assumed to be-

(a) the freely marketable level annuity rate (if any) applicable in the case of the insurance company in question which could be purchased with those sums and assets; or

(b) if the insurance company in question does not offer level annuities, the average of three current market annuity rates for a level annuity.

Dependants Annuity/ Dependant's short-term annuity

Where this page is being read to establish our requirements regarding the above kinds of annuities, the reference to member in Methods Four should be replaced by dependant.

Short-term annuity

The amount of a member's short-term annuity shall be determined in the same manner as a member's lifetime annuity in accordance with any of Methods One to Four described above. Method Five (Flexible Annuity) cannot be used for a short-term annuity.